The 115 Million Dollar Price Fixing Scheme (and counting)
According to the Minnesota Association of Realtors, there were approximately 160,000 residential real estate transactions in Minnesota over the last two years. Over these months, as a result of a poorly-conceived Minnesota Department of Commerce (DOC) decision, home buyers now pay fees which used to be charged to sellers, including abstracting and special assessment searches. In addition, this DOC decision all but eliminated two important closing discounts, which include a buyer’s reissue credit on title insurance and reduced abstracting costs. A typical home buyer now pays 67% more for title insurance and in many cases more than double what the sellers used to pay for abstracting. This unfortunate and ill-considered change has cost Minnesota homebuyers at least $500 per transaction much more with higher priced homes. This adds up to at least $115,000,000 in unnecessary fees and extra profits to title companies. In a real estate environment where many consumers (especially low income ones) are unable to bear any additional costs, this has been a very costly decision, both to the consumers and to the recovery of the real estate market.
Unlike many other states, Minnesota real estate practices had traditionally charged the abovementioned fees to sellers, which was of considerable benefit to homebuyers in the state. Prior to the DOC’s change, buyers’ and sellers’ financial interests were aligned in such a way to create discounts for both (i.e., when sellers provided their prior title policy to the buyer, they benefitted by reduced abstracting fees, while the buyers received a substantial discount on their title insurance fees). When the DOC shifted the payment of abstracting fees to be shifted from the sellers to the buyers, the sellers’ financial motivation to provide their prior policy to the buyers vanished along with both discounts. This delicate balance was interrupted by the DOC, whose lack of understanding of these practices, and poor knowledge of a federal law called the Real Estate Settlement and Procedures Act (“RESPA”), caused them to make what we believe is a poor, and consumer-unfriendly decision. The following spells it out in more detail.
In September, 2010, after consulting with representatives from the title insurance industry and HUD, the DOC issued a press release to the real estate industry instructing them to start disclosing seller paid closing fees as buyer’s fees, erroneously claiming that RESPA required it. Not only was the DOC wrong, but their instructions actually violated that same federal law because the DOC was directing lenders to incorrectly disclose closing fees. Timed almost perfectly with the DOC’s announcement, the Minnesota Association of Realtors released a new purchase agreement “complying” with the DOC’s very profitable instructions (profitable in that most Realtor members are affiliated with title companies that would now be the beneficiaries of the resulting extra fees). It should be noted that the Minnesota State Bar Association chose not to change its purchase agreement and consumers will likely pay less in closing costs if they use that agreement.
The DOC conducted no meaningful due diligence regarding Minnesota real estate practices prior to issuing its press release other than consulting with title industry executives, who coincidentally benefitted from the resulting extra fees. Had they done even the slightest research into Minnesota’s real estate practices, they would have discovered that Minnesota’s practices actually fall within an exception to the federal law with which they were attempting to comply. Instead, the DOC took the position that the fees (in the fine print of the purchase agreement) are still “negotiable” because the Realtor Association created an addendum in which a buyer could still request the seller to pay these fees. Unfortunately, their “solution” does not address the problem of wiped-out discounts, nor does it take into account that most buyers are already maxed-out on the allowable amount of seller contributions rendering the addendum worthless for this purpose.
When presented with this information and asked for the DOC’s help to repair the mistake, Paul Hanson, the Chief Enforcement Officer of the DOC responded, “Would you identify these Minnesotans that have lost this money. Would appreciate a complete list…. We have no complaints about this other than from you.” Despite repeated Data Practices requests, the DOC has refused to fully answer our questions. They claim that they do not know with whom they consulted from the title insurance industry nor who is responsible for drafting the press release in question. The DOC claims that their e-mails are automatically deleted after 6 months rendering much information untraceable. How can a state agency have such a practice in place? Once CAARE uncovered the problem and presented it to the DOC, not only did they refuse to help, they interfered with our efforts to reverse the problem causing our efforts to fail. A CAARE representative flew to Washington DC and obtained HUD’s conditional cooperation to help fix this problem. All they required was that the DOC join them in this effort. The Minnesota DOC refused and gave no reason for their inaction. In these times when home buyers can least afford it, Minnesota buyers are now typically paying double for title insurance products that used to be routinely discounted.
CAARE would like to see an investigation into the DOC’s actions that explains how something like this could happen and, more important, how it can be prevented in the future. In addition, we would like to see this unwarranted and incorrect action reversed bringing back the healthy economic dynamics of 100 years of Minnesota real estate law and practice that was eliminated in a seemingly casual and indifferent manner.
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